The Philippine Banking System

Overview

With the banking system at its core,

the Philippine financial system
remained resilient amid evolving
domestic and global uncertainties. Its
total resources continued to expand,
particularly its lending and investment
portfolios, to support the country’s
financing needs. This asset growth
was funded by deposit generation,
bond issuances and capital infusion.
Banks’ activities brought higher
profitability, while maintaining
adequate capitalization and liquidity
buffers to absorb potential shocks to
operations.
The outlook on the banking system continued to be positive given the
relatively sound macroeconomic performance, adequate liquidity, as well as
increasing capital buffers and opportunities presented by the growing
economy and financial innovations based on the preliminary Banking Sector
Outlook Survey (BSOS) for the Second Quarter of 2019. Moreover, the
country’s robust macroeconomic fundamentals further bolster the BSP’s
capacity to promote and maintain price stability, a stable financial system and
a safe and efficient payments and settlements system conducive to strong,
sustainable, and inclusive economic growth.

While the impact of the Corona Virus Disease 2019 (COVID-19) outbreak is
not yet covered in the BSOS, the banking system is projected to withstand
adverse effects of COVID-19 on account of its satisfactory asset quality and
sufficient loan loss reserves, strong capital position, ample liquidity buffers
and profitable operations.
 Asset expansion was driven by growth in loans and investments

The growth of total assets of the Philippine banking system (PBS) to P18,331.7
billion as of end-December 2019 was primarily due to expansion of funds
channeled to lending and investment activities and sourced from deposits, bond
issuances and capital infusion.

Banking network on an Uptrend

The physical network of the banking system on an uptrend as branch

operations expand their client reach both at the domestic and international
fronts. More than two decades through the BSP’s industry consolidation
agenda starting in 1998, the total number of banking units soared to 12,870
composed of 547 head offices and 12,323 other offices.
 Notwithstanding the decline in the number of operating banks, the overall
branch network continued to expand with the establishment of more regular
branches and branch-lite units.
Across banking groups, the banking system’s network consisted of the
following: 46 U/KBs with 6,915 branches, 50 TBs with 2,683 branches and
451 RCBs with 3,272 branches. U/KBs held the least share in terms of
head office count yet seized the biggest share at 90.5 percent of the
system’s total resources. RCBs consistently seized the lion’s share of
operating banks, albeit many of which are stand-alone head offices.
The continued uptrend in their network highlights the PBS’ commitment to the
BSP’s financial inclusion agenda. In addition to banks’ regular branches and
offices, there were also increasing trends in the establishment of financial
access points through automated teller machines (ATMs) (both on-site and
off-site) and electronic payment and financial services. From last year,
banking system’s ATM network further expanded with the addition of 502
units for a total of 21,780 ATMs. Most of these were installed in the Central
Luzon, the Central Visayas and the Bicol regions.

The BSP supervised financial institutions (BSFIs) continued to embrace

Fintech innovations to thrive in the evolving financial landscape that
increasingly leans towards digitized transactions. As of end-December 2019,
the use of ATMs remained to be the lead electronic facility used by majority
of BSFIs (88). Following major industry players include BSFIs with mobile
banking services (47), Electronic Money Issuers (EMIs) (47) and the retail
(45) and corporate (39) internet banking services. BSFIs engage in electronic
payment and financial services (EPFS) to improve efficiency of financial
transactions.
MISSION STATEMENT EVALUATION

We nurture every Filipino’s future with a trusted approach to

managing money and innovation that makes life easier every day.
COMPONENT YES / NO DESCRIPTION IN THE MISSION STATEMENT
Customers Yes …every Filipino…
Products or Services No
Markets No
Technology No
Survival, Growth, and No
Profitability
Philosophy Yes Every Filipino’s future with a trusted approach
to managing money and innovation
Self-Concept Yes Managing money and innovation that makes
life easuer every day
Public Image Yes Nurture every Filipino’s future with a trusted
approach to managing money…
Employees No

Note:
Review of Mission and Vision Statements:  In the Board strategy session
last December 13, 2019, the Board and the senior management committee
reviewed and approved the Bank's mission and vision and strategic plans
for the coming years.

PESTLE C ANALYSIS

The banking industry is a highly fragmented and made up of various segments

including retail banking, corporate and investement banking as well as asset and
wealth management. The banking industry affects all countries. But it’s subservient
to many factors, particularly to the government and the economy. Banks are unable
to behave independently and must provide services based on specific laws that
affect their growth and offerings.
This PESTLE C Analysis highlights key factors affecting the banking industry.
POLITICAL
The political sector looks all powerful – but it’s susceptible to a bigger giant: the
government. Accordingly, it is the government’s policy to promote and maintain
a stable and efficient banking system that is globally competitive, dynamic and
responsive to the demands of a developing economy.
Political factors acquire a very important role in the context of the baking
industry and financial services sector. Traditionally, these financial institutions
have held immense power and infuence. Due to this the level of government
scrutiny and regulation they have to deal with is also very high.
Government and Regulators. BPI support the government via capital raising
through government securities distribution, payment of taxes, facilitating
remittances, and complying to regulations.
Php 22.07 billion in total payments to government, 19% increase from 2018
29% share in remittance market.
Php 10 billion total capital raised for government.

ECONOMIC
Banks and economic growth are interrelated. A growing economy is good for
banking sector and a healthy banking sector can be good for the regional
economy. Investment banks play an important role in the regional economies
and this is particularly true in the case of the Philippine economy.
The government recognizes the vital role of banks in providing an environment
conducive to the sustained development of the country’s economy. The
Philippines is one of the most dynamic economies in Asia according to the study
by consultancy Asian Banker Research, while the growth of retail banking
income in the Philippines is expected to slow to about 12-13% (from about 17%)
over the next few years, it will still be the second-fastest in the region after
Vietnam.
BPI helps drive meaningful and inclusive economic growth primarily through the
generation of financial value through business operations and distribution to
stakeholders.

The Philippine economy expanded by 5.9% in 2019, below the 6-7% target of
the government. Despite the strength of household consumption, delays in the
implementation of infrastructure projects and the decline in investment spending
dragged growth below the 6% level. For 2020, the COVID-19 outbreak has
become the greatest challenge for the global and domestic economies. The
outbreak will have a negative impact on the economy. However, quantifying the
potential impact of COVID-19 on the Philippine economy is difficult given the
uniqueness of the event.

Total economic value generated increased by 20.1% from Php 78.52 billion in
2018 to Php 94.33 billion in 2019. An aggregate of Php 92.42 billion was
provided to suppliers, employees, shareholders, government, as well as
community investments.
The banking industry and the economy are tied. How income flows whether the
economy is prospering or barely surviving during the times of recession, affects
how much capital banks can access. Spending habits, and ther reason behind
them, affect when customers borrow or spend funds at banks.
Additionally, when inflation skyrockets, the banks experiences the backlash.
Inflation affects currency and its value and causes instability. Foreign investors
think twice before providing their funds when a particular country’s currency
values is high.
Exchange rates also affects banks globally – stable currencies such as the US
dollar impact other currencis like the Philippine Peso, spending habits, and
inflation rates in other countries.

SOCIOCULTURAL
Sociocultural forces too can have a deep impact on the banking industry.
Changing trends and people’s preferences can affect the business and growth
of the banking brands. Cultural influences, such as buying behaviors and
neccesities, affect how people see and use banking options. People turn to
banks for advise and assistance for loans related to business, home, and
academics. Consumers seek knowledge from bank tellers regarding saving
accounts, bank related credit cards, investments and more.
BPI aim to provide every Filipino with easy, convenient, and better access to
financial products and services, making it easier for more Filipinos to save,
borrow, and invest while protecting their assets. Since the start of BPIs Shared
Value journey, Financial Inclusion and Wellness has been central to how the
Bank positively impacts the country. BPI are continuously working to reach out
to underserved segments, ensuring their access to useful and affordable
financial products and services delivered in a sustainable way.

In pursuit of BPIs deliverables, here are some of their program that warrants the
demand of the sociocultural factors of banking sector.

BANKING THE UNDERBANKED

Financial inclusion is at the front and center of the BPI’s journey into a
sustainable future. It is also BPI’s commitment to the Ayala Sustainability
Blueprint, where they champion SDG 8: Decent Work and Economic Growth.
Committing to expand access to banking and financial services to 25% of the
underbanked population of the Philippines.

TEACHING FINANCIALMANAGEMENT
To improve financial literacy in the country,
BPI help educate Filipinos in managing and
making informed decisions about their
finances. Through BPIs business units and
subsidiaries, they aim to expand their
reach, not only to their clients, but also to
the public.

BPI AMTC webinars allowed them to

touch base with clients who wanted to start
investing for their future but had no idea on
how or where to begin. Through the
Investment 101 Session Webinars, BPI
provided a platform for Filipinos to air
their questions and apprehensions, clarify
investment concepts that would have
impeded them from reaching their financial
life goals. With expert investment insights
from our resource speakers, subscribers
 had access to real-time feedback and
response to their investment queries. Free
Estate Planning
Webinars were also conducted by
legal professionals to provide clients with
the basics of estate planning and wealth
transfer.
BPI AMTC went a step further by
providing access to our financial wellness
sessions via Spotify’s streaming platform.
Top notch investment advice and market
updates a are now a few clicks away, with
the use of Spotify, the largest music
streaming platform in the Philippines
today.

An educated, highly trainable, and English-speaking work force has made it

easy for foreign companies to run their operations in the Philppines. However,
the country is not without some social and cultural challenges e.g. corruption,
drug abuse, the traditional views and norms passed from generations to
generations.

TECHNOLOGICAL
Technology is virtually everywhere in the 21 st century. A large part of the tasks
carried out by the banks are carried out online. Information technology has
taken center stage and from customer accounts to loans and insurance, several
services can be availed of online. Technology has added convenience to
banking. However, some issues have also arisen amidst all this technological
developoment and innovation.
Technological innovations continue to shake even the banking industry, thus,
the need to be open-minded and bold on how to tackle new ideas and
developments in the sector. The Bangko Sentral ng Pilipinas (BSP) intends to
continue to foster an enabling ecosystem in the banking industry wherein
competition and responsible innovations are encouraged to thrive. Banks in the
Philippines have all the necessary tools and a supportive regulatory
environment to lead the country into a new era of digital banking. To start this
journey and to exploit the opportunities, banks have to focus on and invest in
their digital strategy, which should involve not only technology, but also process
and organizational reengineering. This is a holistic approach and while there
are risk factors, the truth is that the change is inevitable whether or not banks
are ready.
With the issuance of the implementing rules and regulations of the Data Privacy
Act, banks (as with other entities that collect and process personal information)
are expected to observe certain registration and compliance requirements. The
BSP and the National Privacy Commission are currently reviewing possible
overlaps in their functions with a view to harmonising them for more efficient
regulatory framework.
From a banking relationship that is predominantly transactional, BPI is adopting
a more relationship-driven approach, aided by digitalization. It is the high tech,
high touch approach, a concept borrowed from futurist Alvin Toffler, where
technology serves convenience and security, and high touch fulfills the need for
a more personal approach when it comes to complex or high-value financial
services.
Digital highlights. In less than five years, BPI’s online transactions have
tripled, requiring them to upgrade their core banking system. They embarked on
two upgrades in 2019. BPI’s system must be state-of-the-art if it is to be ready
for the torrent of data that digitalization will surely bring in the years to come.
BPI Online and BPI Mobile app have also been revamped with a new look and
loaded with new features for a more enhanced digital experience. Security
features that include the OTP, or One-Time PIN, and biometrics via fingerprint
and facial recognition further strengthened safety of online and mobile
transactions.
Innovative Consumer Banking. BP’s subsidiary BPI Family Savings Bank
(BFSB) continues to be the largest thrift bank in the country. Its assets have
reached Php 285 billion, constituting 13% of the total assets of BPI as of end-
2019. Its net income of Php 4 billion is 15% of the BPI Group’s total net income.
BPI continues to be one of the leading prepaid issuers in the country despite the
rapid emergence of digital wallets and QR payments in the market. With no
maintaining balance, clients can transact in usage channels comparable to a
debit card. In 2019, BPI also migrated all clients with non-EMV prepaid cards to
EMV-enabled prepaid cards.

ENVIRONMENTAL
Philippines is endowed with more than 7,000 beautiful islands, sorrounded by
bodies of water, lurking volcanoes and natural forests that attracts tourists in the
country. However, with the dynamics of society, as the Philippine economy
continued to move up, with natural calamities and other environmental
challenges, the country is constantly moving two feet forward while leaving one
steb backward. Located above the equator, the Philippines is prone to
earthquakes, an average of 20 typhoons a year and other natural calamities
records billions of loses sucumbing to natural disasters and other environmental
issues.
Sustainability and environmental friendliness has become vital in the banking
industry just like any other businesses. Energy management and other
enviornmental concerns are being addressed by banks “glocally”. Banks like
BPI are investing in energy management, and taking major steps towards
controlling enviromental footprint. Banks are required to publish yearly
environmental reports highlighting their critical achievements over the year
regarding their environmental performance. This permits banks to give positive
image and reducing costs in several operational areas.
Recognizing BPI’s role as a responsible financial institution, they aim to reduce
negative environmental impact coming from the business operations and
become more cost effective through mindful leadership of the organization,
leading to overall improved margins.
BPI track the environmental impact in their business, gathering data on energy
and water consumption, and carbon emission for branches, head offices, and
business centers in the Philippines. Data on energy and water consumption of
BPI branches and kiosks are consolidated per geographical business area. The
Facilities and Services Group (FSG) monitors their head office and other
business hubs. BPI continually explores technological innovations that could
reduce resource consumption and improve environmental tracking systems. BPI
also encourage clients, suppliers, and partners to reduce their own
environmental footprints.
ENERGY and WATER CONSUMPTION

GREENHOUSE GAS EMISSIONS BPI’s greenhouse gas (GHG) emissions fall

under Scope 2 of the GHG Protocol Corporate Standard. Scope 2 covers
indirect emissions from the generation of purchased energy. It is computed
based on the electricity consumption that fall under Scope 2 and the
Department of Energy Grid Emission Factors. For 2019, BPI’s Scope 2 GHG
emissions decreased by 7% following the decrease of electricity consumption.
In terms of GHG emissions intensity – GHG emissions against annual revenue,
BPI have decreased this ratio by 23% from 2018. 2019 GHG emissions intensity
level is at 352 tones CO2e for every Php 1 billion of revenue1 earned.
SHIFT TO PAPERLESS BILLINGS The Centralized Operations Group (COG),
has been closely working with the electronic Statement of Account (eSOA)
Project team to fully implement the migration of paper heavy (Statement of
Accounts, Notices, and Financial Statements) BPI products to align with the
Digitization strategy and most importantly to improve customer experience while
streamlining expenses. 2019 saw the full implementation of the BPI Credit
Cards eSOA project, whereas in previous years, the eSOA was only fully
implemented for BFSB Credit Cards. This year the bank was able to save 12.09
million pages of paper, a 578% increase from 2018 when eSOAs were only
available for BFB Credit Cards. The migration to eSOAs has allowed BPI to
save approximately 1,4522 trees from being cut for paper in 2019.
OTHER EFFORTS Although BPI core business and operations is not heavy on
material resource consumption and waste generation, they are aware that day-
to-day activities still generate waste as an externality. BPI encourage
employees to use and dispose of materials responsibly. The Bank, through
FSG, facilitates compliance to Department of Environment and Natural
Resources related regulations on clean air, water, and hazardous waste
disposal. A pollution control officer, as required will be assigned per
geographical cluster to ensure compliance.

The Bank continued with the regular recyclable fairs and special pick-ups within
the Metro Manila initiated by the Sustainability Office to ensure the responsible
disposal of paper, plastic, and electronic waste for branches and corporate
offices. The Recycling effort was boosted by the file digitization campaign of the
branch network, which allowed them to turnover old folders for recycling. In
total, 513 kilograms of plastic and metal waste, 9,951 kilograms of paper and
carton waste, and 114 kilograms of electronic waste was turned over to partner
recyclers.

LEGAL
The banking industry follows strict laws regarding privacy, consumer laws, and
trade structures to confirm frameworkd within the industy. Philippine banking
sector is impacted by several laws. Accordingly, as mentioned earlier it is the
government’s policy to promote and maintain a stable and efficient banking
system that is globally competitive, dynamic and responsive to the demands of
a developing economy.

The BSP, through the Monetary Board, is primarily responsible for overseeing
banks. The Philippine Deposit Insurance Corporation (PDIC) can also conduct
examination of banks, with the prior apporval of the Monetary Board, provided
that no examination can be done within 12 months of the previous examination
date. Banks must inusre their deposit liabilities with the PDIC. Each depositor
is a beneficiary of the insurance for a maximum amount of 500,000 Philippine
pesos or its foreign currency equivalent.
Banks are subject to the BSP’s Financial Consumer Protection Framework,
which sets out the minimum standards of consumer protection in the areas of:
 Disclosure and transparency;
 Protection of client information;
 Fair treatment;
 Effective recourse; and
 Financial education.
The BSP is responsible for enforcing these rules in the banking sector.
Cybersecurity concerns continue to confront financial institutions (both locally
and worldwide). Top cyberthreats include card skimming, phishing attacks,
ransomware and malware. Accordingly, the BSP has directed banks to adopt
advanced cybersecurity controls and countermeasures, and to imporve the
management of information security risks and exposures.
Violations of any of the provisions of the General Banking Law are subject to the
penalties and other sanctions under the New Central Bank Act.

COMPLIANCE. In pursuit of class leading risk management and

governance practices for the appropriate board size, BPI maintains a 15-
member board.
At the Bank’s 2019 ASM, six out of the 15–member board elected were
classified as Independent, or having no interest or relationship with BPI at the
time of election, appointment, or re-election. Fourteen or 93% of the Board were
Non-Executive Directors, who are not involved in the day-to-day management of
banking operations. (Recommendation 1.2, 5.1 of SEC CG Code for PLCs)
BPI also exceeds both the minimum BSP regulatory and the SEC CG Code
requirements for the number of Independent Directors in its Board, who must
make up at least one- third and not less than two. In 2019, with six Independent
Directors comprising 40% of membership, the Board continues to operate with
significant independence. (Recommendation 5.1 of SEC CG Code for PLCs)
BPI complies with the BSP, SEC and PSE Fit and Proper criteria and
requirements for the position of a director. The General Banking Law of 2000
(R.A. No. 8791) provides the BSP with powers to prescribe, pass upon, and
review the qualifications and disqualifications of individuals elected or appointed
as bank directors or officers and the power to disqualify those found unfit for
positions of bank directors and officers.
BPI has two specialized legal services divisions composed of highly trained
legal professionals with experience in banking and corporate law that serve as
BPI Group’s main legal resource. The Bank’s Corporate Legal Affairs unit has a
critical role of providing proactive legal measures to effectively manage legal
and tax risks. It has the documentation and research department to respectively
ensure that the Bank’s rights and obligations are protected in its contractual
relations and that the Bank is abreast with the most recent legal developments
and requirements. It also conducts a legal risk assessment of potential claims
against the Bank and recommends legal risk mitigation measures. It further
empowers the Bank units by issuing legal and tax advisory bulletins and
providing supporting training seminars that highlight legal issues, new laws, and
regulatory fiats that impact the Bank’s products and services, and promote
awareness of initiatives of various regulatory agencies.
The Bank’s Dispute Resolution and Litigation unit plays a significant role in
protecting the Bank’s rights and interests and in avoiding losses when it is
involved in litigation. It handles criminal, civil, and administrative cases
(including cybercrime cases) for and against the Bank to protect the Bank’s
rights and interests. Likewise, it handles defensive cases filed by any party
against the Bank for any reason.
The Bank views compliance to mean not only adherence to laws, regulations,
and standards but, more importantly, the consistent conduct of the affairs of the
Bank within a culture of high integrity, conforming to ethical business practice,
abiding by the principles of fair dealing, accountability, and transparency. This
ensures that in all its areas of activity, the Bank and its stakeholders are
protected from business risks as comprehensively as possible.
The Bank values its reputation most and the fact that it is trusted by its
shareholders, clients, employees, partners, and members of the communities it
serves. As the Bank’s second line of defense, the compliance function has also
evolved in recent years to adapt to the shift towards more technology-heavy
strategies, as it seeks to deliver the compliance risk management outcomes
required in an era of digital transformation. While remaining a key advisory
function, it has embraced a more forward thinking, risk-based, and stress-tested
approach to continuously monitor, evaluate, and improve its ability to ensure
compliance in a banking landscape that is subject to disruption and rapid
change. Chief Compliance Officer. Oversight of the management of the Bank’s
business risk and implementation of its compliance function is the responsibility
of the Board, through the Audit Committee (Recommendation 2.10 of the SEC
CG Code for PLCs).
At the management level, the compliance function is carried out by the
Compliance Office, led by the Chief Compliance Officer (CCO). Designated by
the Chairman of the Board, the CCO is not a member of the Board and has the
rank of at least a Vice President. The CCO’s qualifications are subject to the
applicable provisions of the Manual of Regulations for Banks, particularly
considering Fit and Proper criteria such as integrity or probity, competence,
education, diligence, and experience and training. The CCO annually attends
training on corporate governance. (Recommendation 1.6 SEC CG Code for
PLCs)
The Compliance Office oversees the implementation of the Bank’s enterprise-
wide compliance programs. These programs consider the size and complexity
of the Bank, the relevant rules and regulations that affect its operations, and the
business risks that may arise due to non-compliance. By using regulatory and
self-assessment compliance matrices, compliance measures are formulated to
mitigate identified business risks and tested to ensure effectiveness. The
Compliance Office routinely provides advice to individual business units on
applicable laws, directives, standards, and regulations as well as provides
compliance support to the Group Compliance Officer. It jointly develops
guidance on operations and business processes in order to guard against
potential compliance risk, and reviews and assists in interpretations of laws,
implementing rules and regulations, standards and guidelines of the BSP, SEC,
Anti- Money Laundering Council (AMLC), PSE, Philippine Deposit Insurance
Corporation (PDIC), Insurance Commission (IC), National Privacy Commission
(NPC), and other regulatory bodies for compliance, communicating them and
verifying adherence. The Compliance Office also helps achieve adherence to
the Bank’s internal confidentiality regulations (“Chinese Walls”); provides regular
training and education for employees on the applicable regulations, rules, and
internal standards; and leads the Bank’s business units in compliance risk
assessment, rules-based testing and reporting.
The Compliance Office is currently organized to cover Regulatory Compliance,
Corporate Governance, Anti Money Laundering Compliance, FATCA
Compliance and the Data Privacy Office. Considering the rapid developments in
the regulatory sphere, as well as the growing complexity of the Bank’s products,
services, and transactions, the Compliance Office evolves in its coverage of
compliance practice areas to anticipate and meet future challenges.
Enhancement of compliance function’s scope and domain is redefined for new
and emerging sources of compliance risk.

The Compliance Office is also empowered by 22 Group Compliance Officers

(GCOs), who are embedded in operational units throughout the Bank. The
GCOs enforce Compliance Office initiatives, as well as provide timely reports to
the Compliance Office. The Compliance Office applies a three-layered
compliance testing and monitoring process, which includes unit self-assessment
testing conducted by GCOs and independent random testing performed by the
Compliance Office. Independent periodic review is conducted by the Bank’s
Internal Audit Division. Results of compliance testing are reported regularly to
the Audit Committee. Overall enforcement is through self-regulation within the
business units, and independent testing and reviews conducted by the
Compliance Office and Internal Audit.

In conclusion, the banking industry is held accountable by the government.

What and how they offer services are determined by politics and current
governmental laws. Additionally, banks are at the whim of the economy –
inflation rates can devastate banking prospects as it affects the value of
currency.

Technology is helping consumers spend and save money with readily available
apps and online services. For many daily transactions, it is not required for
users to visit their branch anymore. This in turn, saves the use of paper and
gas spend from driving to and from banking locations.

Legally, banks regard consumer laws, trade agreements, and privacy laws.
They also must have top-notch cyber security with the growing use of
technology in banking transactions.